Nov 7 - Standard & Poor's Ratings Services said today that its ratings and
outlook on Dallas-based telecommunications provider AT&T Inc.
(A-/Stable/A-2) are not affected by the company's announcement that it plans to
invest about $14 billion over the next three years to expand and upgrade its
wireless and wireline networks to support the growing demand for data by
consumers and businesses. As a result of these growth initiatives, management
increased its target net leverage to 1.8x from 1.5x. We estimate that our
adjusted leverage will rise to around 2.8x during this period from the mid-2x
area, which is still supportive of an "intermediate" financial risk profile,
albeit at the higher end of the
maximum leverage parameter. Our leverage calculation includes AT&T's proposed
contribution of $9.5 billion to its employee pension fund in the form of AT&T
Mobility II LLC preferred equity.
The company also expects that capital expenditures will increase by about $3
billion, to $22 billion in 2013 through 2015, which could constrain free
operating cash flow (FOCF) during that period, although our rating assumes
that most of AT&T's FOCF will be consumed by its dividend and ongoing share
Notwithstanding the potential for modestly higher leverage and lower FOCF in
the near-term, Standard & Poor's believes that these investments will likely
improve the company's longer-term business position, including its
profitability. We currently view AT&T's business risk profile as "strong,"
bolstered by its wireless business. The company plans to invest around $8
billion in the wireless segment, which it will use to expand 4G Long Term
Evolution (LTE) coverage to 300 million population equivalents (POPs) by 2014
from an expected 150 million at the end of 2012. Additionally, it will invest
in small cell technology, Ethernet backhaul, and distributed antenna systems
to improve spectral efficiency, density, and the operating efficiency of its
wireless network, which provides the potential for improved wireless EBITDA
service margins, from 41% as of Sept. 30, 2012.
AT&T also plans to invest about $6 billion in its wireline business, about
half of which it will allocate to the expansion its U-Verse product to about
8.5 million addressable homes, or to 43% of its footprint from the current
32%. It will also increasingly deploy fiber to improve its consumer and
business broadband services, and will eventually decommission its traditional
circuit switched wireline properties, which we expect will result in some
improvement in its wireline EBITDA margins, which are currently about 32%.